Inference of Bidders' Risk Attitudes in Ascending Auctions with Endogenous Entry

Hanming Fang and Xun Tang

No 19435, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Bidders' risk attitudes have key implications for choices of revenue-maximizing auction formats. In ascending auctions, bid distributions do not provide information about risk preference. We infer risk attitudes using distributions of transaction prices and participation decisions in ascending auctions with entry costs. Nonparametric tests are proposed for two distinct scenarios: first, the expected entry cost can be consistently estimated from data; second, the data does not report entry costs but contains exogenous variations of potential competition and auction characteristics. In the first scenario, we exploit the fact that the risk premium required for entry - the difference between ex ante expected profits from entry and the certainty equivalent - is strictly positive if and only if bidders are risk averse. Our test is based on identification of bidders' ex ante profits. In the second scenario, our test builds on the fact that risk attitudes affect how equilibrium entry probabilities vary with observed auction characteristics and potential competition. We also show identification of risk attitudes in a more general model of ascending auctions with selective entry, where bidders receive entry-stage signals that are correlated with private values.

JEL-codes: C12 C14 D44 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-com, nep-ecm and nep-upt
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Published as Fang, Hanming & Tang, Xun, 2014. "Inference of bidders’ risk attitudes in ascending auctions with endogenous entry," Journal of Econometrics, Elsevier, vol. 180(2), pages 198-216.

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Journal Article: Inference of bidders’ risk attitudes in ascending auctions with endogenous entry (2014)
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